Hawaiian loses $50M as string of profits ends

Hawaiian Airlines' long-term growth plans caused some short-term pain last quarter, but it was the persistently high cost of fuel that finally ended the carrier's three-year string of quarterly profits.

The state's oldest carrier lost $50 million in the April-June period after taking a pretax lease termination charge of $70 million tied to the purchase of 15 Boeing 717-200 interisland aircraft it had been leasing.

But Hawaiian President and CEO Mark Dunkerley said Tuesday it was the high cost of fuel that ultimately pulled the airline into the red.

"Clearly, this was a quarter that broke our streak of three years of quarterly profits, and it reflects the fact that the cost of fuel has eaten through our profitability where we've lost money for the first time in three years," Dunkerley said. "Even without the one-off adjustment, we lost money, so the (charge) affects the degree we lost money but not the fact."

Fuel costs jumped 72.3 percent last quarter to $135.5 million from $78.6 million a year earlier and represented 29.1 percent of operating expenses, or 34.3 percent excluding the lease termination expense.

It was Hawaiian's first loss after 12 straight quarterly profits that began in the second quarter of 2008. The last time Hawaiian came up short was in the first quarter of 2008 when it lost $19.9 million.

"I think in all areas we're seeing pretty good demand for our service," Dunkerley said. "People want to travel and think Hawaii is an attractive destination for those outside the state. I also think the kamaaina want to move within the state. So the issue we have today is not a lack of interest in travel; it's the fact that the price of oil has escalated from roughly $60 to $70 a barrel a year ago to today's range of more like $95 to $100 a barrel."

Dunkerley said Hawaiian will spend about $200 million more on fuel in 2011 than in 2010 and that the airline has seen inflation in other areas as well.

"We've seen many of our suppliers raise their rates, and it's been quite an inflationary environment for airlines," he said.

"We are raising our interisland baggage fees to help raise revenue at a time when the price of oil is causing us to lose money," he said.

Revenue rose 25 percent last quarter to $395 million from $315.9 million a year earlier.

Dunkerley said even without the pretax $70 million charge, the airline would have had a loss of $8 million after taxes stemming from an accounting loss from fuel hedging. He said the value of the fuel that Hawaiian contracted to be delivered went down about $8 million from March 31 to June 30.

"When you blow all the froth off the beer (from the lease termination charge and the fuel hedging), Hawaiian made a total of $72,000, basically break even," said analyst Bob McAdoo of Prairie Village, Kan.-based Avondale Partners LLC.

Analysts' consensus was for earnings of 1 cent a share, while McAdoo was predicting 3 cents a share.

When all the items are included, Hawaiian ended the quarter with a loss of 99 cents a share compared with a profit of 17 cents a share in the second quarter of 2010 when the airline made $9 million.

Hawaiian, which bought the 15 Boeing 717s in June for $230 million, took the $70 million charge because it reflected the present-day value of the planes compared with the lease commitment that existed on those aircraft before the deal. The deal will allow Hawaiian to reduce its fleet costs over the long term.

In addition, Hawaiian said last month it was leasing three additional 717s that would be delivered in September, October and November that would allow the airline to selectively add some capacity at peak hours of the day and peak days of the week to handle growing connecting traffic.

Hawaiian, which has 17 Boeing 767-300ERs and four Airbus A330-200s that are used for long-range routes, will give back one 767 but add an A330 before the end of this year to remain at the same fleet level. However, the airline has four A330s that will arrive in February, March, May and June, while it will lose one Boeing 767 at the end of the year. The net addition of three aircraft next year gives Hawaiian some options.

"We're got a range of possibilities, including raising the number of frequencies on existing routes," Dunkerley said. "We're looking at all of our options right now. We're not in position yet to announce what we're going to do. We're keeping our powder dry to see how the market develops."

Dunkerley said Hawaiian has candidates in Asia, even though it just added routes to Tokyo, Seoul and Osaka, Japan, in the past eight months; as well as the East and West coasts of the U.S. mainland.

He said he's upbeat for the remainder of the year.

"Looking into the future for as far as we can see, which is a few months ahead, bookings continue to be pretty strong," Dunkerley said.

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